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How Will AI Work Against Insurance Fraud?

Posted: 23 Dec 2019 08:00 AM PST

Insurance scams cost the U.S. economy tens of billions of dollars each year. Now, insurers are adding artificial intelligence to their fraud-fighting toolkit. My company uses AI to stop e-commerce payment fraud by detecting unusual behavior and stolen data. Insurance claims are less standardized and more complex than a typical online purchase, but the industry is finding ways to use AI to reduce fraud by policyholders, providers and criminal gangs.

The FBI estimates that insurance fraud costs more than $40 billion annually. That means the average household pays $400 to $700 more in premiums each year. Those numbers don't include health care insurance fraud, which is rampant and harder to quantify. Estimates of the scope of health care fraud range from 3% to 10% of annual health care spending. That translates to anywhere from $68 billion to $230 billion per year, driving up premiums for businesses and families.

Who commits insurance fraud?

When it comes to identifying fraudsters, the insurance industry has a very different challenge than the e-commerce industry. E-commerce fraudsters are typically unethical shoppers committing return fraud or organized criminals buying items for resale with stolen card data. But insurers face a different fraud landscape with more players. 

Individuals can commit fraud in several ways. One is by providing false information that gets them a lower premium. For example, 10% of auto insurance policyholders falsely state that their vehicles are garaged at night. Policyholders can also exaggerate the amount of damage caused by an accident or injury – or fake an accident or injury. 

A small number of unscrupulous agents embezzle premiums instead of forwarding them to the insurance company. Scammers posing as agents can also steal premiums and damage the insurer's brand in the process.

Claims adjusters are responsible for validating claims and spotting fraud before insurers must pay for it. Unfortunately, some adjusters go bad and exploit their knowledge of fraud prevention to enrich themselves. One high profile case in Florida involved an adjuster who took bribes from businesses and consumers. He got caught and then worked as a police informant without his employer's knowledge. When the news broke in 2018, the company had to review its internal processes and do public damage control.

Providers, like claims adjusters, are largely honest and conscientious, but a few engage in fraud. In health care, provider fraud includes false or exaggerated claims, medically unnecessary procedures, kickbacks for referrals and other schemes. Other types of provider fraud include overbilling for auto and home repairs. Auto shops and contractors may also charge for new parts and materials but use cheaper used items to make the repairs.

Organized criminal groups commit the most health care fraud, according to the National Health Care Anti-Fraud Association. Crime rings have also been busted for scams against federal crop insurance programs, homeowner insurers and commercial trucking insurers.

Faced with so many types of fraud from so many sources, insurers are always looking for better ways to screen applications, evaluate claims and identify bad actors. 

How AI can help detect different types of insurance fraud

The same capabilities that make AI so powerful against e-commerce fraud also help fight insurance fraud. AI algorithms can analyze large amounts of data quickly to find patterns. Then they can spot anomalies that don't fit the patterns. For example, by comparing new claims to existing data, AI can help detect claims values that are unusually high. 

Visual analytics can assess auto or property damage based on images and videos and determine if the damage amounts claimed are accurate or not. Is that damaged rear bumper really a $10,000 claim, based on the visual evidence and other data from similar claims? AI can help sort it out quickly.

AI can also take a higher-level view of a company's claims, employees and policyholders to look for patterns that could indicate large-scale fraud. This kind of analysis can include behavioral data and transaction histories. For example, if employees' online behavior indicates that they're struggling with debt, and they also have unusual new patterns of financial transactions, the algorithm might flag them for more review to see if they are receiving kickbacks in exchange for claims approvals or inflations.

Or, to take an example from health care, if a clinic or hospital has an unusually high number of expensive procedures compared to similar facilities, or procedures that cost substantially more than the industry average, investigators may want to take a closer look. The U.S. Department of Health and Human Services reported to Congress in early 2019 that it's exploring AI and machine learning to help it root out organized health care fraud. 

Federal adoption of AI could change the way large-scale health care fraud is identified. Already, the HHS Office of Inspector General and its state and local law enforcement partners lead regular takedowns of national and regional health care fraud rings. One bust in 2018 named more than 600 defendants in $2 billion worth of Medicare and Medicaid fraud. 

The investigation required the resources of more than 1,000 law enforcement agents across the country. AI could assist in cases like this by analyzing multiple large sets of data quickly and identifying anomalies faster than humans can. That could give agents the information they need to target their investigations and stop fraud faster. 

In the case of health care fraud, the stakes are more than money. The 2018 scheme uncovered by the HHS included illegal distribution of addictive opioid medications which have caused a public health crisis. So, using powerful analytics and machine learning may not only help root out fraud and save taxpayer money, but it may also save lives. 

The limits of AI in fraud detection

It's important to keep in mind that AI can't, and shouldn't, replace human expertise when it comes to evaluating fraud, for two important reasons. First, the algorithm may not always get it right, especially when it's new and has a relatively small dataset to learn from. Sometimes what looks like criminal behavior may have a valid and benign explanation. And it's important to keep in mind that AI can learn biases that skew outcomes if the databases contain biased information or were built based on biased practices. 

In e-commerce fraud prevention, it's best practice to have a fraud analyst review any orders that AI flags as possible fraud – a process that often includes talking with the customer to validate their information. Rejecting a good customer will often drive them away for good. Rejecting a valid claim can damage the insurer-policyholder relationship and may lead to legal action against the insurance company. 

The second reason it's critical for AI-flagged claims to go through an expert review is that human expertise helps the algorithm get smarter. When analysts find flagged claims or anomalous patterns that aren't fraud, they can feed that data into the algorithm so it can learn to identify similar cases and evaluate them more accurately. Over time, the AI system gets better at telling the difference between fraud and legitimate activity.

Right now, fraud is a costly fact of life in many industries. It wastes money and draws resources away from core business functions. As we've seen, health insurance fraud can also endanger people's wellbeing and lives. But as insurers and law enforcement agencies start to work with AI to spot potential problems and evaluate claims more accurately, insurance fraud may become much harder to get away with. 

Tax Reform: 5 Things You Need to Know

Posted: 23 Dec 2019 05:00 AM PST

  • The new 20% deduction for pass-through businesses can be taken by small business owners who earn less than $157,500 for individual filers and $315,000 for those who file jointly.
  • If you provided transportation fringe benefits for your staff, such as parking privileges or public transit passes, they are no longer 100% deductible.
  • A net operating loss is when your deductions exceed your income for the year. This is called an NOL year, and small businesses can now only carry this deduction forward, not backward, and deduct it from their income on another year.  

With the new year upon us, many small business owners are turning their attention to taxes. Since Congress passed the biggest tax reform legislation in over 30 years on Jan. 1, 2018, many small business owners will find that this legislation affects their taxes for the 2019 tax year. 

The tax bill modified the federal income tax brackets, doubled the standard deduction and altered several other tax credits. The original bill, The Tax Cuts and Jobs Act, was initially introduced in the House of Representatives in November 2017 and signed into law by President Donald Trump on Dec. 22, 2017. 

Many revisions have since taken place, and while most are generally positive for small businesses, five major changes, in particular, might impact your small business as you prepare to file your tax return for 2019. 

1. Lower tax rates

Who doesn't like lower tax rates? The tax rate for small business pass-through entities (such as S-corporations, limited liability companies, partnerships and sole proprietorships) used to be the same as your individual tax rate. 

With the change in tax law, though, that income is now subject to a 20% deduction instead. As with most tax law provisions, there are exceptions to taxable income levels: $157,500 for individual filers and $315,000 for those who file jointly. 

Anyone whose income is below $157,500/$315,000 can take that deduction; however, service providers need to be vigilant. "Once taxable income exceeds those thresholds, the law places limits on who can take the break," said Jeffrey Levine, CPA, director of financial planning for BluePrint Wealth Alliance. "For instance, entrepreneurs with service businesses – including doctors, lawyers and financial advisors – may not be able to take advantage of the deduction if their income is too high." 

There is no distinction in tax rates based on business size, according to Calloway Cook, president of Illuminate Labs. "The federal corporate tax rate in the U.S. is 21%, and the state corporate tax rate varies by state," Cook told business.com. 

Cooks says that if filed correctly, many online businesses will be able to take advantage of the home office tax deduction. "This deduction entitles the business owner to $5 per square foot of the home which is used in an office capacity," Cook said. 

2. Entertainment expense

The tax law changes have also removed entertainment expense deductions. This is across the board, affecting sole proprietors, LLCs, S-corps and C-corps. While many small business owners weren't buying skyboxes or funding weekend golf trips, even the little things are no longer exempt. 

The law no longer allows any kind of deduction for the following: 

  • Membership dues to a club for recreation or social purposes
  • Any activity considered amusement, entertainment or recreation
  • Use of a facility for any of the above purposes 

This even extends to meals. Most meals were deducted in relation to IRC Section 274(a), related to entertainment expenses.   

Author, CPA, and attorney Mark Kohler observes in a blog post that this will have a profound effect on the cost of doing businesses. "Do you know how much business is transacted on the golf course, in the skybox or over a mud bath at the spa? As a tax professional, I'll tell you – a lot! What happened to courting a new client and trying to get to know each other a little before closing the big deal? Entertaining is a huge part of doing business," wrote Kohler. 

3. Higher bonus depreciation

This has always been a tricky one. What you could take as an upfront depreciation on real estate or equipment has changed nearly every year, with a percentage upfront and then the rest applied over the next few years. Tax reform has simplified this, with 50% upfront in 2017 and 100% every year thereafter. The bonus depreciation percentage is reduced for property placed in service after 2022. 

The IRS states that the 100% bonus depreciation "generally applies to depreciable business assets with a recovery period of 20 years or less and certain other property. Machinery, equipment, computers, appliances and furniture generally qualify." It also applies to used equipment, not just new, as long as it meets other requirements listed in the provision. 

4. Impact on benefits for employees

Every business owner wants to do what they can to make their employees feel appreciated. Tax law used to support that, but not as much anymore. If you provided transportation fringe benefits for your staff, such as parking privileges or public transit passes, they are no longer 100% deductible. 

The transportation benefit has been repealed completely. If you have onsite eating facilities for your employees, the deduction has changed from 100% to 50%. It is still tax-free for your employees to use. 

5. Net operating losses

A net operating loss is when your deductions for the year exceed your income. This is called an NOL year; small businesses used to be able to deduct it from their income on another year. It exists to provide some tax relief for small companies. This means when you make money, you pay taxes, and if you didn't make any money, then you can get some tax relief. 

"While companies themselves can't get a tax break if they're pass-through entities (like sole proprietorships, partnerships and S-corporations), their owners can apply their net operating losses on their personal income tax returns," said Jennifer Stinnett with SmartAsset. 

Under the old law, you could carry an NOL back two years or forward for the next 20 years. With tax reform, businesses can no longer use an NOL retroactively for two years, but the 20-year limit has been waived, and you can deduct up to 80% of the applicable taxable income. 

Overall, Cook believes that the GOP's Tax Cuts and Jobs Act is a net benefit to most small businesses. "The only businesses under this law which will see an increase in tax rate are those making less than $50,000 profit, which is a very small percentage of businesses even at the local level," Cook said. "Cutting corporate taxes allows businesses to reinvest, which increases the chance of business success."
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